Homeowners Underwater with Second Mortgages Increase

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Almost 40 percent of homeowners nationwide who took out second mortgages are underwater on their loans. That is more than twice the rate of owners who didn’t take out such loans.

According to the Wall Street Journal, nearly 40 percent of homeowners who have a second mortgage. A report by real-estate data firm CoreLogic says 38 percent of borrowers who took cash out of their residences using home-equity loans are underwater, or owe more than their home is worth. In addition, 18 percent of borrowers who don’t have these loans were underwater.

Second mortgages are weighing on a fitful recovery, in which housing has figured as particularly weak spot. The S&P/Case-Shiller National Index last week showed that home prices tumbled 4.2 percent nationwide in the first quarter, its third straight quarter of price declines after a modest recovery in early 2010. Nationwide, prices have fallen 34 percent since their peak in 2006. The inventory of unsold homes will take 9.2 months to sell, according to the National Association of Realtors, which about 50 percent higher than what is considered a healthy level.

CoreLogic found that borrowers with second mortgages had deeper levels of negative equity than borrowers without second mortgages. The negative equity comes to an average of $83,000 compared with $52,000. In many cases, borrowers withdrew cash from their properties using home equity loans or lines of credit, a type of second mortgage. The CoreLogic report does not include cash-out refinancing.

In addition, according to Federal Reserve Board data, homeowners took out a total of $2.69 trillion from their homes at the height of the housing boom between 2004 and 2006.

“Easy access to home equity loans during the housing boom put borrowers who extracted home equity at more risk,” said Mark Fleming, CoreLogic’s chief economist. “The price declines were felt more severely by people who took out home-equity loans.”

The CoreLogic report found that the percentage of underwater homeowners declined slightly in the first quarter. About 10.9 million Americans who borrowed to buy their homes, or 22.7 percent of all homeowners with a mortgage nationwide, were underwater in the first quarter, down from 11.1 million, in the fourth quarter of 2010.

CoreLogic said the decrease does not show an improving market, but instead, reflects completed foreclosures, which reduced the total number of homeowners in the market.

“The implication is that there are still a lot of people who are at risk of default, so delinquency and default rates are going to reflect that large amount of negative equity for some time to come,” said Jan Hatzius, chief U.S. economist for Goldman Sachs Group.

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